Coinbase Direct Listing: Impact on Fintech & Crypto Startups

Coinbase's Direct Listing: A Watershed Moment

Coinbase’s direct listing represented a significant event within the finance, startup, and cryptocurrency sectors. It had a considerable impact on a wide range of stakeholders, including public and private investors, early employees, and those passionate about crypto. The company exceeding a $100 billion valuation on its first day of trading was undeniably the most prominent startup event of the year.

The ramifications of this transaction will continue to be felt within both the public and private markets for some time to come.

The Anticipated Halo Effect

Leading up to Coinbase’s flotation, and particularly following the release of its impressive Q1 2021 earnings, a widespread expectation emerged. Many believed the unicorn’s direct listing would create a positive ripple effect for other startups operating in the same space. Ruth Foxe Blader of Anthemis articulated this view to The Exchange, describing the listing as a pivotal moment for cryptocurrency, signaling an upcoming “wave” of innovation.

This prevailing sentiment prompted two key questions: Would Coinbase’s success stimulate increased private investment in crypto-focused startups? And would this success attract greater investor attention to other areas of fintech?

The Exchange delves into startups, markets, and financial matters.

Access it daily on Extra Crunch or subscribe to The Exchange newsletter every Saturday.

Investor Perspectives on the Impact

It’s reasonable to assume that Coinbase’s listing would positively influence its sector and related industries. However, to validate this assumption and understand the underlying reasons, The Exchange consulted with venture capitalists specializing in fintech. An analyst panel was also included to provide a comprehensive perspective.

The response wasn't a straightforward affirmation. Investment in the cryptocurrency space can take various forms. These range from direct coin purchases to investments in established exchanges, and even supporting cutting-edge decentralized blockchain initiatives. While increased capital availability for crypto projects is generally anticipated, its ultimate destination within the market remains uncertain.

Broader Fintech Implications

We will now consider the potential impact of Coinbase’s direct listing on venture capital investment in the wider fintech landscape, beyond just cryptocurrency.

Following our recent analysis of the exceptionally active venture capital market in the first quarter, we are again assessing the current state of the private market. Let’s gather insights from those directly involved and understand their observations.

Diverse Approaches to Crypto Investment

Here's a breakdown of the different investment strategies:

• Direct Coin Purchases: Investing directly in various cryptocurrencies.
• Centralized Exchanges: Funding established platforms like Coinbase.
• Decentralized Blockchain Efforts: Supporting innovative projects at the forefront of blockchain technology.

The influx of capital is expected, but its allocation within these areas is still being determined.

Ultimately, the success of Coinbase’s direct listing has opened new avenues for discussion and investment within the fintech world.

Has the Risk Profile of Crypto Startups Improved?

The direct listing of Coinbase established a company valuation exceeding that of all but two leading blockchains: Bitcoin and Ethereum. While several other blockchains possess aggregate coin values reaching the 11-figure level, a 12-figure valuation remains uncommon within the crypto asset landscape.

The significance of Coinbase’s post-listing valuation is noteworthy, as stated by Chainalysis Chief Economist Phillip Gradwell. Gradwell explained to The Exchange that “Coinbase’s $100 billion valuation illustrates the potential for venture investors to achieve substantial returns by investing in crypto companies, not solely cryptocurrencies.” This validation benefits the entire ecosystem.

Essentially, investing in companies operating within the crypto sphere is now a demonstrably viable option, rather than exclusively allocating capital to direct coin purchases. Alternatively, consider that Coinbase’s share price growth since its inception in 2012 is comparable to the returns generated by certain coins over the same period.

Sarah Kunst of Cleo Capital further elaborated on this shift, informing The Exchange via email that “it is now a legitimate strategy for a crypto startup to articulate plans for an IPO, as opposed to solely relying on acquisition or an ICO as established exit strategies within the U.S.”

Kunst’s observation suggests that the emergence of additional, validated exit routes for crypto startups inherently reduces their risk profile. A decrease in risk coupled with demonstrated potential for growth is a compelling narrative for attracting capital.

The positive momentum isn't solely attributable to Coinbase’s direct listing or recent Bitcoin price peaks; these factors contribute to increased private capital flow into crypto-focused startups. Barbod Namini of HV Capital noted that Coinbase’s listing, “in conjunction with growing regulatory support and corporate investment in crypto,” creates a favorable environment.

Namini anticipates “ongoing venture capital interest in the space” as cryptocurrencies evolve into an asset class appealing to both institutional investors and everyday consumers.

Is the outlook uniformly positive for the crypto market? Not entirely.

Potential Gains for Novel Cryptocurrency Ventures

The direct listing of Coinbase represented a positive development for the cryptocurrency sector as a whole, yet it’s worth noting the relatively conventional nature of the company’s core operations. It functions primarily as an exchange, deriving revenue from transaction fees. Furthermore, it operates within a framework of increasing regulation and maintains connections to traditional financial systems.

The success of the Coinbase venture wasn't universally anticipated. Following the commencement of Coinbase trading, The Exchange consulted with Tom Loverro of IVP, who spearheaded Coinbase’s 2017 Series D funding round. Loverro indicated that a key insight of his firm, differentiating them from others, was recognizing that equity markets don’t offer a direct comparison to cryptocurrency markets. A common expectation was that Coinbase’s trading fees would decrease to levels typical of equity-based businesses. This prediction proved inaccurate. Currently, Coinbase generates a significantly higher proportion of its assets through fees, attributed by Loverro to services such as secure storage and custody; it’s an exchange, but possesses a distinct economic structure compared to its predecessors.

While Coinbase’s primary business model is readily understood by many investors, the future trajectory of the crypto space holds even greater potential for innovation.

According to Barry Schuler from DFJ Growth, who led Coinbase’s 2015 Series C investment, “a considerable number of innovative concepts are currently being tested, particularly concerning company structures and more decentralized governance models.” He added that these concepts will require time to fully develop, but could ultimately be “highly transformative.” Schuler concluded his communication with a humorous observation that the anticipated influx of capital into the crypto space following Coinbase’s direct listing will likely be allocated to ventures involving substantial risk. He emphasized that “venture capital inherently carries a high degree of risk!”

This is certainly true.

However, Coinbase itself may ultimately succeed in many of these emerging areas. Could this success, in turn, curtail the potential returns for other private investors supporting nascent companies within the crypto market?

Gradwell of Chainalysis explained to The Exchange that any company aiming to establish itself in the crypto market by pursuing avenues not currently addressed by Coinbase will face significant challenges. “Undertaking initiatives that Coinbase doesn’t currently pursue is a difficult undertaking,” he stated. “Coinbase now possesses the resources to tackle those initiatives! If they aren’t doing so, it suggests either a limited addressable market, inherent risks, or that it represents a tangential market.”

Despite the widespread optimism that the Coinbase listing will stimulate increased venture capital investment in crypto startups, a degree of caution is warranted. The extent to which Coinbase can capture and dominate the expanding market remains uncertain, although IVP’s Loverro expressed strong confidence during our discussion regarding the company’s expanding range of features – such as Tezos staking and Uniswap purchasing. Its supporters believe Coinbase is favorably positioned to capitalize on future market growth within its specialized area.

Should Coinbase continue to expand into the most profitable segments of the growing crypto market, it could restrict the ability of smaller companies to emerge and cater to new applications. Furthermore, now being a publicly traded company, Coinbase is able to pursue aggressive acquisitions to prevent competitors from gaining future market share.

The presence of an established player in a market isn’t necessarily negative; every major technology company today has either challenged or displaced existing incumbents. While Coinbase may not prove to be unassailable, many believe its early lead and substantial capital base will provide it with a sustained competitive advantage.

Let us now expand our perspective to consider the potential effects of Coinbase’s direct listing on companies operating in the broader fintech sector, outside of cryptocurrency.

The Potential Ripple Effect on Fintech Investment

The substantial valuation achieved by Coinbase represents a significant financial gain for numerous venture capitalists. This, in turn, has the potential to stimulate additional investment activity, as highlighted by Richard Johnson, founder and CEO of Texture Capital. He suggests that a considerable portion of the returns realized by early investors and employees could be reinvested into nascent startups.

The magnitude of these returns is noteworthy. Coinbase’s success has propelled three investors – Loverro, Micky Malka of Ribbit, and Koh Nakamura from Sozo Ventures – onto the Forbes 2021 Midas list.

Forbes’ analysis reveals that Initialized’s 0.8% stake in Coinbase yielded a return 2,200 times its initial investment at yesterday’s market close – a figure equivalent to 80 times the size of Initialized’s inaugural fund. Furthermore, this calculation doesn't even factor in Y Combinator’s involvement, where Garry Tan played a key role. The combined $300,000 investment from these two entities has now grown to exceed $2.4 billion, as Tan himself pointed out on YouTube.

This influx of capital undoubtedly increases the funds available for startups, particularly those receiving investment from individuals who regularly provide funding. However, the specific allocation of these funds beyond the cryptocurrency sector remains uncertain, even within the broader fintech landscape. Schuler commented that predicting Coinbase’s impact on established fintech companies like Robinhood is currently premature.

Coinbase is currently benefiting from a premium valuation as a leading entity in a novel market segment. It remains to be seen whether the positive momentum in the cryptocurrency market will extend to fintech companies not directly involved with crypto assets.

It’s important to remember that the fintech sector, as a whole, is already demonstrating considerable strength, including within the consumer fintech space, as noted by Robert Le, PitchBook’s senior analyst for emerging technology. He stated that VC investors have maintained a positive outlook on consumer fintech companies for an extended period.

In this context, Coinbase provides further evidence supporting the potential for substantial revenue generation through retail fintech products, mirroring the success of Robinhood and extending beyond institutional offerings, according to venture investor Kunst.

Consequently, Coinbase reinforces the existing positive trends supporting B2C fintech businesses. Le forecasts that this direct listing, alongside other public offerings from companies like Affirm, SoFi, MoneyLion, and the anticipated listing of Robinhood, validates the bullish stance of VCs. He anticipates continued strong venture investment in consumer fintech throughout 2021 and beyond.

Expanding on this perspective, Namini suggests a broader view beyond consumer fintech. He believes Coinbase’s IPO contributes to a sustained favorable market environment for fintech overall. While B2C models have dominated recent headlines, he predicts a growing number of B2B infrastructure companies will further strengthen this narrative in the coming years.

Finally, consider a perspective from Eileen Burbidge, partner at Passion Capital. She authored a piece for TechCrunch arguing that past political engagement was justified, but future involvement in political issues outside the company’s core business should be avoided. This stance led to internal dissent and the departure of employees concerned with “broader societal issues.”

Burbidge communicated to The Exchange following the direct listing that the event serves as “a strong testament to crypto as an asset class,” and one that “hopefully paves the way for more and increased crypto legitimacy and trust — and over time crypto company cultures and values which have more alignment with broader social values.”

This sentiment is widely shared and represents a positive outlook for the future.